Greenspan, who ran the US central bank for almost 20 years until 2006, said demand from Europeans for property investments that paid high rates of interest encouraged them to buy mortgage-backed securities that were tagged by credit-rating agencies as low risk.

Without the huge demand for exotic derivatives and the "dubious" participation of credit-rating agencies, along with investment banks, hundreds of small-time fraudulent mortgage lenders and a government bent on encouraging wider home ownership across the US, the crisis could have been avoided.

In testimony before the Financial Crisis Inquiry Commission, Greenspan said securitised sub-prime mortgages were the cause of the crisis, based on huge demand from US and European investors, and ratings agencies that applied AAA ratings to packages of sub-prime mortgages that were more likely BBB.

He contradicted several members of the commission, which is drawn from Congress and the business community, who accused him of failing to monitor developments in the sale of sub-prime mortgages and the way they were packaged into collateralised debt obligations without sufficient capital to support them.

Greenspan argued that no regulator could take action to prevent unforeseen events and only regulations forcing banks to maintain larger amounts of capital could save the world from a repeat of the crisis.

The commission chairman, Phil Angelides, a former treasurer of California, accused Greenspan of avoiding responsibility for presiding over a property asset boom, much of it fuelled by an epidemic in mortgage fraud, and failing to stop banks such as Citigroup adopting risky practices.

Angelides, a Democrat, said the Fed failed to take action to prevent or mitigate the housing bubble or tackle the growing market in mortgage-backed securities. "You could've, you should've, but you didn't," he said.

The Democratic congressman Bill Thomas asked why Greenspan kept interest rates low during the first half of the decade when it was obvious property prices were soaring and an asset bubble was getting out of control.

Greenspan told the committee that the Fed was unable to influence long-term interest rates, which govern mortgage rates. He said keeping base rates low was crucial to businesses affected by the US recession in 2003 but it had lost its power to dampen housing speculation. The influx of foreign funds was a bigger influence on long-term rates, he argued.

He admitted, as he did before a congressional committee last year, that the Fed was partially to blame for the crisis, but only because it was in tune with mainstream academic and financial assessments that it was not in the interests of banks to take unnecessary or life-threatening risks.

"We had a 70% success rate, and if you get it right 70% of the time that is exceptionally good," he said.

Bigger factors in the crisis were the government's encouragement of homeownership and a lack of enforcement by other agencies against mortgage brokers selling fraudulent loans, he claimed.

Greenspan also took a swipe at accounting regulations that allowed banks to "sell" securities known as collateralised debt obligations (CDOs) to off-balance-sheet vehicles.

"It is not that they sold them to off-balance-sheet vehicles, it is that they subsequently were forced to buy them back. It was dubious in accounting terms," Greenspan said.

Angelides asked why the Fed had ignored repeated warnings from consumer groups and the FBI that fraud was rife in the home-buying industry and prices were artificially inflated.

Greenspan answered that the majority of poor practices were in the unregulated shadow banking industry beyond the view of the Fed.